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Subhiksha founded in 1997 by R. Subramanian, an IIT-IIM graduate.

It operated over 1600 outlets selling groceries, fruits, vegetables, medicines and mobile phones and positioned itself as value retail chain. It adopted strategy to cut price, focus on lower & upper middle class, and opened shops near catchment area of customers. It started with one store in Chennai and within a short span the count reached to 1600 outlets (2008). Why did Subhiksha SuperMarket Fail ?

Rapid store expansion in various formats from groceries, medicines, mobiles, electronics, consumer durables and IT without sufficient fund in hand. Operated on very slim or zero margins as a result higher cash outflow whereas inflows were almost nil. Not much attention to customer service resulted into bad quality service at store level. Downstream supply chain was not integrated as a result lower fill rates and customer dissatisfaction. Expanded business through debt (` 7500mln debt). In October, 2008 the company ran out of enough funds to manage its operations. Poor inventory management resulted into defective inventory, breakages, lower fill days and pile up inventory.

Executive Summary The objective of this report is to assess the strategy failure of Subhiksha, one of the pioneers of discounted retail format in food and grocery retail Industry. The company was started by R. Subramanian, an alumnus of IIT Madras and IIM Ahmadabad, in 1996 when Indian market was not much familiar with organized retail. They started with a business model that was based on cost leadership and was focused on Indian middle class segment. The business began operations in 1997 from its first store in Chennai through food, grocery and pharmacy retailing. They later ventured in retailing of mobile phones and grew at a moderate pace till September 2006. After that, citing the booming Indian economy and increasing interest of Indian companies in organized retail, they decided to go for a national footprint. The company till then had presence only in state of Tamil Nadu, India. Buoyed by their success so far in organized retail they took up an ambitious expansion strategy to grow by over 600 stores in 6 every 6 months. However, the company went down in early 2009 when they had run out of cash to run their operations. The company has defaulted on employee salaries, vendor payments and owed a debt of around 740 crores to multiple investors. This report analyzes the reasons that led to the downfall of a company that seemed to have a sound business strategy. After detailed analysis of the facts that can be gathered, the conclusion is that the company failed due to inefficient operations, decision to fund expansion by working capital and reliance on high debt financing. Time of expansion plans coincided with global economic downturn contributing further in aggravating Subhikshas problems. Had they not tried to act too fast on expansion they still would have been able to control the operations and bring back business on track. Subhiksha should have strengthened the backend operations and replenishment logistics before going ahead with their expansion plans. They should have also secured funds to finance the expansion, restructured their debt by offsetting it with some equity and not used the working capital to fund expansion. Introduction R. Subramanian believed that since discounted organized retail format was nonexistent in India, it would provide him the first mover advantage if he ventures in this domain. From his research of three months he found that Grocery was one of the largest categories of spending for the average customer that they were extremely price sensitive on groceries and that discount stores were the largest growing format. 4. Research also revealed that Indians prefer to buy grocery as fresh and would not really prefer to stock that and they would prefer to buy it from close by. This led to the launch of Subhiksha with following strategic decisions

Sanskrit word Subhiksha (prosperity) was chosen as the name of the brand because it reflects Indian ethos and it is a word that can be understood all over India. Setup of multiple small stores across the city rather than one big store centrally within the city. We decided to set up 1,000 sq ft shops all across the city and not a 10,000 sq ft big store at one location in Chennai4 he said. To differentiate Subhiksha from the existing retail stores, they need to sell the branded products at discounted prices. It was believed that this would attract the customers as branded products will not vary in quality even when bought from different store, and this new store will be Subhiksha for consumers. Brand mantra for the store was why pay more when you can get it for less at Subhiksha? The model was to make profit by providing economies from scale. We genuinely believe that by enhancing our efficiency, we are helping the consumers to save more. We are also happy that we are introducing a model that is Indian, capable of supporting the middle class of India 1 said R. Subramanian. Their retail stores have to be no frills and should operate from low cost properties to keep the cost structures down. No Air conditioning, No staff to take people around and stocked with products that are fast moving and already known to consumers. Location of stores would be in off the road properties. With an investment of Rs 4-5 Lakhs they opened their first store in Thiruvanmayur at Chennai in the month of March 1997. Soon enough after their launch they were accused by the enraged retail traders of undercutting their business by selling at low prices, however court ruling favored Subhiksha. They had opened 10 stores by the end of 1997 and another 10 by the end of year 1999. End of year 1999 was also the time when they had started to break even because the sales were picking up and consumers were responding in more numbers. Subhiksha has grown to almost 50 stores by the end of 2000. This was the time when ICICI ventures bought 10% stake by investing Rs. 15 Crores in the business. This gave Subhiksha the much wanted liquidity and credibility in the market to bargain better with suppliers and effectively cater their debt requirements.

Figure 1: Growth of number of stores In the year 2004 and beyond lot of foreign direct investment started flowing in to India, with total investments increasing more than 700% from 2004 to 2006 3. This was also the time when western organized retail chains like Wall Mart and others as well as Indian corporate houses like reliance and Aditya Birla Group were planning to setup their own retail stores in India. That is when Subhiksha decided to scale up their operations and go ahead to have a national footprint, till now they had only been operating in the state of Tamilnadu. They decided to grow in parallel in most of the states rather than growing sequentially (i.e. one state at a time). They raised 160 crores of equity, 220 crores of debt and another bridge loan on 125 crores to fund their highly ambitious plans of going national. They tried to grow very fast, which is evident from the fact that they had 160 stores on Sep 2006, 670 stores in Mar 2007, 1320 stores in Mar 2008 and 1650 stores in Sep 2008 In all almost 1500 stores were added in 24 months. In his interview with Madhavan4 Subramanian said that Business was growing like mad. Despite the cost pressures in 2006 after Reliance, the Birlas and others announced plans to enter retail, between 2006-07 and 2007-08 we doubled our stores (from 670 to 1,320), tripled our revenues (from Rs 833 crore to Rs 2,305 crore) and almost quadrupled our profits (from Rs 11 crore to Rs 39 crore). In March 2008, Azim Premji, chairman of Wipro, bought in 10% stake in Subhiksha through his investment arm Zash Investments which was offloaded by ICICI ventures for Rs. 230 crores. However, Indian economy had started growing at a fast pace during these years 3. And also the Indian organized retail was now crowded with big names likes Reliance Fresh, Big Bazaar, Food Bazaar, Spencers Retail, Food World and More store. The growth of economy had started to put pressure on rental costs of the Subhiksha stores and increased competition had put pressure on the people costs.

Due to rising input costs, both property and people costs, and companys expansion strategy sucked lot of liquidity out of the operations and left company cash strapped. This led to the non-payment of staff salaries for over 4 months, defaulting on rent on properties and payments to the vendors. Industry, during then was also abuzz with news about the company going bankrupt which also impacted their plans to raise cash for operations when their operations were at halt with no money to proceed. This was denied by Subramanian, then director of Subhiksha, however he agreed that he need to sell stake to raise cash to service his debts and operating costs. Subramanian was convinced that the business was viable and only issue was that they have no cash to run operations which can only be solved by infusion of at least Rs. 300 crores7. In his opinion cash problem could be addressed through debt restructuring exercise, by offsetting some of his debt through equity route. Their lender ICICI bank took up the retailers case for debt restructuring exercise to RBI. All their lenders, including both private and foreign banks, had sought for the review of accounting books of Subhiksha to raise money and put company back on track.

Figure 2: Distribution of debt across lenders Overall Subhiksha had an overall debt of around 750 crores.

Methodology The data used in this paper are collected from the articles published by different newspapers (economic times, the Hindu), magazines (Business Today, Business World) and other business articles (Rediff Business news) cited in the notes and references below. This paper also includes the excerpts of published interviews conducted by different people with Mr. R. Subramanian. Information has also been gathered from the free videos available online. Some of the interpretations come from personal experience of the author while shopping at Subhiksha stores in Noida. Analysis R. Subramanian entered the retail business after a careful choice between his options of Information technology and organized retail. Non existence of organized retail and the idea of gaining first mover advantage made Subramanian venture into the domain with Subhiksha.

Business Strategy

Low cost middle class focused Business strategy of Subhiksha can be explained as follows Who are their target customers? Subhiksha was looking for the price sensitive Indian customers who wish to buy discounted fresh groceries and brand products. Which is predominantly middle class segment, buying often from the market rather than stocking as that allow improved cash flow for home budge. What need to satisfy of target customers? Consumer research by Subhiksha revealed that Indian consumers prefer to buy food fresh and thus want to buy it from a place close by to their home. After all that has also been idea that contributed to success of Kirana stores in India. Also their need is to maximize the utility of their home budget and hence buying the products at discounted prices without compromising on quality. How to satisfy that need? Subhiksha decided to sell the branded and fast moving consumers goods at discounted prices through no-frills store. They decided to operate on low margins and believed that profitability could be achieved through operational efficiency and economies of scale.

Operations Strategy To achieve these business goals, Subhiksha knew that they have to reduce their input costs. Property rental costs and people costs are the two costs that contribute to most of the expenses for a trading business after cost of the goods sold. They focused on different areas of their operations to bring down costs and provide value to customers. Subhikshas Operational strategy can be

explained as follows They decided to operate from smaller stores all across the city rather than big stores located in the centre of the city. Idea behind this was to locate the stores in such a way that average distance from the house of potential consumers would be less, so that they can visit the store more often. They decided to operate from properties that are located off the street. The reason to reduce the rental costs for the properties, as generally off street properties can be rented on good bargain than on street stores. They believed that customers could still be attracted with discounted products with same quality & brand promise. They decided to stock only fast moving consumer goods so that presence of item on the store shelf can be minimized and hence reduce the operation cycle. Shorter the operation cycle, more and more profit the company can generate. They decided to keep their stores no frills. No air conditioning, no staff to take people around, stocking products people are already aware of and no spends on decoration lighting in the store were the few ways to bring the store costs down. All this was believed essential for low cost strategy. They designed store formats in such a way that consumers enter from one end, walk through the store and exit from other end. Exit end has the billing counter and also a security guard.

Figure 3: Subhiksha Retail store format They used information technology to efficiently run operations. Each store would update the central database about the stocking requests by end of day. And all these requests would be catered by various central warehouses efficiently before store opening next day. Subhiksha used to buy all the products on cash. Paying upfront is also a good way to get wholesalers price down, says R Subramanian, founder and CEO of Subhiksha Supermarket and Pharmacies 2. Their expansion strategy resulted in opening of around 500 stores in 6 months during their later years, and thereby allowing them to go for bulk purchase contracts with vendors to source centrally for all the stores. This started giving them benefits of economies of scale. For financing its operations Subhiksha brought in investors like ICICI ventures and Azim Premjis Zash Investments. This brought in both liquidity and credibility to their business and allowed them to enjoy a greater bargaining power with suppliers. They had setup customer loyalty programme, Subhiksha tracked their customers through loyalty cards and these card holders got attractive discounts on special products. This program allowed them to gather consumer data and provide more focused benefits. This also allowed them to provide services like home delivery.

What went wrong with Subhiksha? Subhiksha did lot of right things, however they also failed on certain aspects which led to the failure of the company and forced them to close down operations. Subhiksha financed most of their operations and expansion plans through secured or unsecured debt from banks. They were considering raising capital through equity route however stock market started falling globally after collapse of Lehmann Brothers and they are left with no option to go through this route. A certain amount of debt is good when a company is making above average returns, however a company losing money in operations and expansions will bleed with high debt financing. This is what happened in case of Subhiksha. Subhiksha did the worst mistake of financing their expansion plans through working capital. A company cannot sustain operations without working capital. As the company grows it often requires larger working capital, however Subhiksha did exact opposite. Their working capital was financing

their expansion, hence was getting reduced as the operations grew which left the company with no money. The desire for expansion was so overpowering Subhikshas management that they ignored the need to strengthen supply chain, distribution and replenishment logistics. They got caught up in issues that come with scale. This led to the empty shelf in stores and dissatisfied consumers. There were also indications from ICICI ventures in their one of the filings to the court regarding the lapses in corporate governance on the part of founder of Subhiksha and Managing director R. Subramanian Economic environment in 2008-2009 also contributed to the downfall of Subhiksha. Due to financial companies going bankrupt and steep downward slides in stock market, investors grew very cautious in taking investing decisions and ran to safety avenues. This closed the Subhikshas options to raise further debt or equity to fund its operations. Agitated unpaid employees, unpaid vendors and cash losing investors lost their trust in the organizations capabilities which led no support from them. What they should have done differently? Subhiksha had a very good opportunity to raise money from Indian stock market by offering an IPO in 2007 and early 2008 4. This would have allowed them to capitalize on the goodwill created by investment of Azim Premji in their business. However, they kept postponing the plans as the founder and director Mr. R. Subramanian was not willing to dilute the company stake. They kept financing through secured and unsecured loans which they could not service when they were cash strapped. Subhiksha should have secured sufficient funds through both equity and debt financing moderately balancing their risk before going after expansion plans. Investors interest in the company and growing Indian economy had allowed them to have both. Subhiksha went for an aggressive expansion strategy in later 2006. However, they ignored the strengthening of their supply chain, replenishment logistics and distribution when they started expansion. That should have been planned along with their expansion strategy. These operations designed to run with small number of stores were not able to fund the suddenly increasing number of stores doubling tripling within months. The stores started having empty shelves; operations lost the track of the goods movement and left customers dissatisfied. Working capital required to run operations should have not been used to fund Subhikshas expansion plans. Expansion should have been delayed or slowed down the moment company started facing issues with funds. A proper monitoring system/process should have been in place that would have alerted them about draining working capital. Conclusion Subhiksha operated for around 10 years; first 7.5 years growing moderately and last 2.5 years expanding at very aggressive pace. Even though starting in nascent Indian organized retail sector they could not enjoy the benefits for long.

Failure of the company can mostly be attributed to their own mistakes and to some extent the coinciding of their expansion plans with global economic downturn. Subhiksha, unlike many other enterprises, did not mitigate their risk by maintaining appropriate debt and equity exposure for financing and could not service its mounting debts. They lost the trust of their employees who were not paid for over 4 months and had their provident fund payments also pending. They lost their vendors by defaulting on their payments. They lost the trust of investors and credibility in the market. Though the company did not declare bankruptcy, its surrounded by the lawsuits filed, in different courts of India, with closed operations since 2009. Having lost all the trust, business support system and left with a trashed brand, R. Subramanian can do nothing to revive it.

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